Today we’re looking at a newsletter from Doug Casey’s stable, the first
one of his teasers that I’ve looked at in quite a while.

The pitch is that Marin Katusa has picked 19 consecutive winning stocks for
his Casey’s Energy Report, and that you can subscribe now to get in
on pick number 20, which is apparently getting close to their buy price.

As they put it …

“Marin’s just getting started. Winner #20 is already on his radar, and
chances are it’s going to deliver even higher returns than any of the other
19.”

Katusa apparently has a “three-tiered formula” that helps him make money
for subscribers — the first tier is a network of energy insiders that he
cultivates, the second tier is some kind of mathematical valuation/screening
“system” that helps him target buy prices, and the third tier is his team of
energy analysts, who he naturally believes are “the best and brightest.”

I have no idea whether or not those “tiers” really mean anything or are
just a marketing ploy, but I would imagine that they’re probably not lying
about the 19 winners (though they may not count or credit them the way you
would) — notice that we weren’t told that he’s had 19 picks that beat the
market, just 19 “winners,” which the little footnote indicates were all
chosen in the last quarter of 2008 and the first eight months of 2009, so it’s
possible that even picking 19 “winners” in a row could have your overall
portfolio trailing the S&P 500. Not to throw cold water on the claim, I
certainly haven’t ever picked 19 winners in a row, but we might also argue
that every hot streak has to end at some point.

I didn’t receive the email ad for this one directly, I just got the link
sent along to me recently, so I can’t tell you for sure when the ad started
running — which means it’s possible that this “number 20″ pick has
already been made.

So, with those caveats, what is this stock that’s Marin Katusa’s possible
20th consecutive hot pick? You may or may not be delighted to hear that it’s a
geothermal stock … a sector we’ve looked at many times in the last couple
years, but which one?

“Winner #20 is a geothermal company. And geothermal energy is not only
one of the most reliable alternative energies — it will be one of the most
profitable, as President Obama continues to pump money into the green sector
through subsidies.

“The man behind this company is a legend in the resource sector for his
financial insight. It’s no wonder he’s been dubbed the ‘broken slot
machine’ for his unrivaled ability to make shareholders money.”

OK, so that’s actually maybe enough for us to identify this stock … but
we get a few more clues, let’s use ‘em …

“Recently, winner #20 filed its IPO (initial public offering), and
investors as well as industry insiders clamored to get a piece of the action.

“As often happens with IPOs, this frenzied buying quickly inflated and
then deflated the stock price, which for now has returned to a more realistic
level. During the imminent market decline, Marin believes all stocks will
suffer a temporary setback, creating a tremendous buying opportunity.

“An opportunity to ‘back up the truck’ on this new hot stock at a
significantly reduced price.”

And as every good copywriter knows, throwing in some quotes from
well-respected news organizations makes your deal look more substantive, and
quiets the voice in the readers head that says, “what if this is all just a
scam?”

So yes, we get a few press quotes, too:

“‘Investors around the world are leaping on the initial public offering
of [this] Canadian geothermal energy company, highlighting the soaring
interest in the geothermal space and the superb track record of [the
company's] founder.’ -Reuters”

and

“[This geothermal stock] ‘is definitely one of the hottest deals of the
year.’ -The National Post”

and

“Geothermal is one of the great answers to our energy crisis. Add the
facts that: [1] you’re not exposed to commodity prices, [2] you’re not
exposed to the dictators of the world, and [3] you’re not throwing away your
domestic product to foreigners. It’s just a great, great business. -IBT
Commodities”

and

“‘President Barack Obama’s American Recovery and Reinvestment Act
provides tax credits for geothermal projects, and the American Clean Energy
and Security Act is laden with more incentives for clean energy investment.’
-The Financial Post”

If you’ve been around these parts for a while you’re probably familiar
with the concept of geothermal energy — drilling into hot zones, pumping in
water, using that heated water to create steam that powers turbines and generate
electricity, it’s been proven as a concept for years, at least in hot zones
like Iceland and The Geysers in Northern California. Geothermal generation is
certainly a lot more “green” than burning coal or natural gas, and provides
baseload (”always on”) energy unlike sun-dependent solar or wind-dependent
turbines, though it also comes with complications (not least that it can be
expensive to drill and develop, and for best results you need a very hot area,
and the process is pretty tough on the equipment), so I’ll spare you the rest
of Katusa’s general argument in favor of geothermal energy.

This last bit, then reiterates the importance of the man behind the company:

“When asked about winner #20, ‘Vancouver’s mining maven’ had this
to say:

“‘The object is to do the same thing we did [with my silver producer]:
to build the biggest geothermal energy business in the world.’

“We have every confidence he will do it.

“Indeed, the long-term profit potential is staggering.

“That’s why Marin and the whole Casey team are on board with winner
#20.”

This is the latest endeavor of Ross Beaty, that “mining maven” teased
above who has indeed been called the “broken slot machine” for his record of
past success (he sold Equinox to Hecla Mining 25 years ago, and more recently
built Pan American Silver into the world’s largest silver producer). The quote
above, about how he wants to build Magma into the biggest business of its kind
in the world, is from
an interview that he gave almost a year ago, before Magma went public.

And the company did have it’s Canadian IPO this Summer, a bit behind their
original schedule, but they got a fair amount of attention and at the time it
was the biggest Canadian IPO of the year — and Beaty apparently got what he
wanted, in that interview he noted that he was hoping the IPO would value Magma
at $300-400 million, and it’s now got a market cap of C$450 million. That
makes them one of the bigger “junior” companies in the space, bigger than
the small firms that have just one or two sites under development like U.S.
Geothermal, but much smaller than Ormat or Calpine. Probably the closest
competitor, in terms of market cap size and focus, is Ram
Power (RPG in Toronto, RAMPF on the pink sheets — one
of two geothermal stocks in an uptrend at the moment, according to MarketClub),
which is a similarly new company in its current form, a rollup of Ram Power and
the junior geothermal companies Polaris Geothermal and Western GeoPower, both of
which have been teaser targets in recent years as well.

Magma is still very much an early stage company in terms of operations —
they are buying into a big established geothermal project in Iceland (they own
about 43% now and are investing in expansion, it’s primarily a site that
generates power for aluminum smelting), and they own one operating geothermal
site in Nevada (Soda Lake, which has been operating for close to 20 years and is
at about 1/3 of its nameplate generation capacity). Their other projects are
elsewhere in the Northwestern US, in Utah and Oregon as well as more sites in
Nevada, and in South America, with concession applications in Peru and some
early-stage projects that they own in Argentina and Chile. Aside from Soda Lake
and Iceland, it’s all early stage exploration, or flow testing, or drilling
and mapping that they’re doing right now. I have no idea how long it takes to
get these projects off the ground, but it sounds like a lot of the work
they’re doing, in addition to the few places where they’re actually doing
exploratory drilling, is updating old seismic and survey data from these sites
that is in some cases 20-30 years old. The company describes their pipeline as
having 24 early stage projects and seven advanced stage exploration projects
around the world, including several new exploration targets that they just
acquired in a government auction earlier this year.

The way Magma reports its projects, they have 86 MW of reserves (75 from
Iceland, 11 from Soda Lake — though from what I can tell Soda Lake is only 8MW
right now) and over 600MW of “resources”, which is apparently the documented
potential of their other projects. Of that 600 MW about half is Iceland (HS Orka
is the site they have part ownership of), and the other half is split between
one big discovery in Chile and a number of smaller Nevada and Utah properties.
Another 20 or so early stage properties are not counted in the reserves or
resources. According to the timeline they’re projecting, they will boost
production to about 100 MW overall next year, and bump up slightly again in 2012
through expansions in Soda Lake and Iceland, then have production close to
double in 2013 with two new Nevada plants online, and jump considerably in 2015
with several of their other projects joining the party, including most notably
the large 140 MW Maule project in Chile. So that’s the five-year growth plan,
and their goal is to be acquisitive and create a global company to consolidate
global geothermal generation, so they may well buy up some other projects along
the way.

Magma does not have any debt, and they’ve raised well over C$100 million
recently (from the IPO, the over-allotment, and a subsequent private placement)
and have another C$20 million in credit available, so they should be in fine
shape financially, and ready to keep growing by investing in exploration and
perhaps acquiring other companies and projects, but there seems little chance
that they’ll be profitable anytime soon — which is perhaps why they funded
the Iceland investment by selling new stock instead of using their IPO proceeds.
They have already received some federal money for their Nevada projects, and it
looks like part of their calculus certainly depends on federal “green
energy” grants and similar funding, which is no surprise. You can see Magma’s
most recently quarterly report press release here, which details their work
so far this year and their financial position, and a December
investor presentation that goes into some more detail on their projects here [pdf
file].

I don’t have any particular insight into which geothermal stocks are the
best bet, but it does seem that Magma might be the best “story” right now
— having a charismatic and successful resource investor at the helm, lots of
cash, and a nice big position in the most well-known geothermal resource in the
world (Iceland) certainly helps. As I noted, the other company that has a
somewhat similar profile is Ram Power, and smaller firms include US Geothermal
(HTM
in NY, GTH in Canada — this
is the other one that MarketClub thinks is in an uptrend) and Nevada
Geothermal (NGP in Canada, NGLPF on the pink sheets), both of which are
currently generating electricity, and Sierra Geothermal (SRA in Canada, SRAGF on
the pink sheets), which is more capital constrained and not yet producing, but
apparently has some promising sites and permits and may be bought up by Ram
Power (or so I’ve read in one place, at least). The biggest pure play I know
of is Ormat (ORA), which is an Israeli company as well known for building
geothermal plants for others as for operating them themselves, it’s fairly
expensive, but profitable and much less volatile.

So there you have it — one more geothermal stock to throw on the pile, it
may or may not work out as they hope but I’m quite certain that this is the
pick teased by Casey’s Energy Report. If you’re more “hotted
up” about this sector than I, I’m sure you’ll have some insight or
information to share … that’s why the friendly little comment box is sitting
below, just waiting for your input.

Travis Johnson is the Stock Gumshoe.
He unravels the email teasers from investment newsletters and advisors, and
tracks their performance.